How Does Your Credit Score Affect Insurance Costs?

In the past, a bad credit score mainly kept you from getting a mortgage or a low finance charge on a loan. While that is still true, a person’s credit score has become a factor in qualifying for a cell phone contract or even an apartment rental. Potential employers can legally request your credit score before hiring you, and insurance companies can base your premiums — high or low — on your credit score. In fact, many home and auto insurers have changed their pricing models in recent years to include consumer credit scores as a factor in determining insurance premiums (except in Massachusetts, Hawaii or California, where the practice has been banned). Though this may sound somewhat surprising, this method of pricing provides yet another example of how your credit score can affect you in many facets of your daily life.

Why does my credit score matter to insurers?

Though it would seem credit scores have nothing to do with insurance claims, studies have shown a strong correlation between the two. “Research indicates that people who manage their personal finances responsibly tend to manage other important aspects of their life with that same level of responsibility, and that includes being responsible behind the wheel of their car or in maintaining their home,” said Donald Hanson of the National Association of Independent Insurers.

On the other end of the spectrum, people with low credit scores have historically demonstrated a higher likelihood to file insurance claims than those with high scores, prompting insurance companies to weigh in credit health when determining rates.

Since insurers evaluate a person’s risk potential when calculating premiums, generally the more risk you pose, the higher your premiums. According to the Insurance Information Institute, the average cost of a claim for a person with below-average credit is $918 — 53% higher than the average claim. Likewise, the cost of an average claim from a person with an above-average credit score is $558 — 23% below the average claim. So, with lower credit scores adding up to higher claims, insurance companies are passing on the cost to those types of consumers via their premiums.

So, if I have a lower credit score, how do I keep my premiums down?

First, you can weigh the cost of making a claim against the out of pocket cost of fixing damage to your car or home on your own. Avoiding claims while you have a low score can help keep your premiums stable. Of course, another solution is to maintain a good credit score, but if your credit score is already low, it will take time and diligence on your part to raise it. If you’re in the process of rebuilding your credit, shop around for insurance quotes from multiple providers. Each insurance company has their own standards, so you may be able to get a better deal at a different provider, especially if you haven’t had any insurance claims.

I’ve raised my credit score, now what?

If you have received an increase in your credit score lately, it’s time to call your insurance company for a rate review. If your company will not adjust your rate or wants you to wait six months, again, consider shopping for a better rate with another provider based on your improved credit score. Considering the fact that people with low credit scores can pay 20 to 50% more in insurance premiums than those with higher scores, it’s worth doing some research to get the best insurance premium rate you can for the credit score you’ve earned.